Pricing Strategies

Among 4 Ps of marketing price is the only element that produce revenue. The other elements produce cost. It can be changed frequently and prominently unlike the product features and channel commitments. At the same time Pricing and Price Competition are the no. 1 problems Pricing is double-edged sword.

Most common mistakes made by companies while deciding Prices

Prices are too cost oriented It is not revised often enough to capitalize on market changes It is set independent of the rest of the marketing mix, rather than intrinsic elements of marketing strategies.

HIGH (PRICE) HIGH (PR. QUALITY) MEDIUM

MEDIUM

LOW 3. Super value strategy 6. Good value strategy

1. Premium 2. High Strategy Value Strategy 4. Over charging strategy 7. Rip off strategy 5. Medium value strategy

LOW

8. False 9.Economy economy st strategy

Pricing Decisions will depend upon freedom it enjoys

Perfect competition: Monopoly: Oligopoly: few sellers each having appreciable share. Close collaboration in policy determination for production and sales. Price leadership. Monopolistic Competition: There are many sellers in some way differentiate the product in minds of the customers.

Pricing Policy
1. Selecting pricing objective 2. Determining Demand 3. Estimating Cost 4. Analyzing competitors cost, prices and offers 5. Setting a pricing method 6. Selecting a final price.

Selecting Pricing Objective

Survival: Companies are plagued with over capacity, intense competition, and changing customers wants. Often companies cut prices since profits are less important than survival. Companies try to cover variable cost and little fixed cost. Maximum Current Profit: Importance is given for cash flow and return on investment. Companies may scarify long run performance ignoring the effects of other marketing mix variables, competitors, reactions.

: Selecting Pricing Objective Contd

Maximum Current Revenue: It requires estimation of demand function. Managers believe that it will lead to long run profit maximization and market share growth. Maximum Sales Growth: Companies are interested in in maximizing the unit sales. The belief is higher sales volume wil lead to lower unit cost and higher long run profits. Assumption is that market is price sensitive. It is also known as penitration pricing

Selecting Pricing Objective Contd:

Maximum market Skimming: It involves setting up of high prices. It is possible because sufficient no. of buyers have high current demand, the unit cost for producing is not too high, the high price does not attract more competitors, it communicates the image of superior product. Product t quality Leadership: Premium quality premium price strategy Non profit and public orgn. May adopt different pricing strategies.

Determining Demand
Price sensitivity Estimating demand Curves % change in Qty Price elasticity of = -----------------------demand % change in price Each price lead to different level of demand.

Estimating Costs
Fixed Costs (Overhead costs) Variable cost Total cost= Fixed cost + Variable cost

Analyzing competitor's cost, prices and offers

Company needs to benchmark its cost against its competitors cost to learn whether it is operating at a cost advantage or disadvantage. The quality comparison is also important

Selecting Pricing Method

Given 3 Cs- the customers demand schedule, the cost function and competitors price- the company is now ready to select price. The price will be somewhere between one that is too low to produce profits and that is too high to produce enough demand.

Selecting Pricing Method Cond:

Mark-up pricing or Cost plus Pricing: The most elementary pricing method. This is possible when seller determine cost much more easily. Under this method the price is set to cover costs, material, labour, overheads and a predetermined % of profits. Unit cost Price= ---------------1- Desired return on sales

Mark up Mark up expressed as % of Cost= -----------Cost Mark up Mark expressed As % of SP= --------------Selling price

Selecting Pricing Method Cond:

Target Return pricing (ROI) : The firm determines the price that would yield its target rate of return on investment. desired return x capital Price= Unit Cost + -------------------------Unit sales

Selecting Pricing Method Cond:

Perceived Value pricing: Buyers perception is more important than the sellers cost. Price is set to capture the perceived value. Firm develops a product concept for a particular target market with a planned quality and price. Market research is needed to establish the markets perception of value as a guide to effect pricing. Advertising and sales force are used to increase perceived value.

Selecting Pricing Method Cond:

Value Pricing: Fairly low price for a high quality offering. An important type of value pricing is EDLP (everyday low pricing) Going Rate Pricing: The prices are based on competitors prices. Small companies follow the leader in oligopoly. Sealed Bid Pricing: competitive- oriented pricing is common where firms submit sealed bids for job.

Selecting Pricing Method Cond:

Marginal cost pricing: fixed cost are ignored and prices are determined on the basis of the variable costs. Customary Pricing: Prices remain more oe less fixed due to the product being in market for considerable period of time. Only when costs change significantly, the customary prices of these goods change.

Selecting Final Price

Pricing methods narrow the price range from which company must select the final price Imp. Factors to be considered while selecting the final price Psychological Pricing: Many customers use price as a indicator of quality. Image pricing is specially effective with ego. Many sellers believe that prices should be in odd numbers.

Selecting Final Price Contd:

Influence of other mktg. mix elements: Usually higher ad budget helps brand to charge higher prices. Companys Pricing Policies: Companies give this responsibility to pricing departments who believe that sales people quote prices that are reasonable to consumers and profitable to the company.

Selecting Final Price Contd:

Impact of price on other parties: Dealers, distributors, sales force, competitors reaction, suppliers, Government inerventions.

Special Features of Pricing

Price discounts and allowance: Cash discounts, quantity discounts, functional discounts, seasonal discounts, allowance. Promotional pricing: To stimulate early purchases and it includes special event pricing, cash rebates, low interest financing, longer payment terms, warranty and service contracts and psychological discounting.

Special Features of Pricing Contd:

Discriminatory Pricing: Companies often modify their basic price to accommodate differences in customers, products, location. It occurs when company sells product at 2 or more prices. It Includes Customer segment pricing Product form pricing Image pricing Location pricing Time pricing

1. 2. 3. 4. 5.

Special Features of Pricing Contd:

1. 2. 3. 4. 5. 6. Product mix Pricing: In this the company searches for a set of prices that maximizes profits on the total mix. It includes Product Line pricing: Firms normally develop lines rather than single product Option feature pricing: Companies offer optional features and services along with main product. Captive product pricing: Products to be used with main product. Two part pricing; Service firms often engage in twopart pricing By product pricing: Product bundling pricing.

Special Features of Pricing Contd:

Responding to competitors price changes: When the product has homogeneity the firm has to match the competitors price. If the product is non homogeneous then the buyer choose the product on the basis of quality, service, reliability. Options with market leader to face price cut by competitors are Maintain price Raise perceived quality Reduce price Increse price and improve quality.

1. 2. 3. 4.